High oil, weak rouble to boost Russian finances before election but pose inflation risks

Rising oil prices and a weak rouble could boost Russian state coffers before a parliamentary election this autumn, giving the authorities more leeway for social spending despite the risk of fuelling inflation. This year's budget deficit is forecast to come in at 2.4% of gross domestic product (GDP), but Russia could end up with a surplus and even pocket up to $25 billion in additional revenues from higher oil prices and a weak rouble, analysts say.

Rising oil prices and a weak rouble could boost Russian state coffers before a parliamentary election this autumn, giving the authorities more leeway for social spending despite the risk of fuelling inflation.

This year's budget deficit is forecast to come in at 2.4% of gross domestic product (GDP), but Russia could end up with a surplus and even pocket up to $25 billion in additional revenues from higher oil prices and a weak rouble, analysts say. Provided the average oil price this year stays at $50 per barrel, the budget deficit could narrow to just 0.5% of GDP and even return to surplus if Russia's flagship Urals oil blend trades above $55, said Sofia Donets, chief economist at Renaissance Capital.

That could come in handy for the authorities before what will be the last major electoral test in Russia before a presidential election due in 2024. Government sources told Reuters this month that the authorities were preparing a new social package worth at least 500 billion roubles ($6.8 billion) to ease discontent before the vote.

The arrest and jailing of opposition politician Alexei Navalny prompted nationwide protests in recent weeks which also drew in people unhappy about living standards, underlining the importance of an economic issue the Kremlin says it will tackle. The Kremlin denied at the time having plans for a new social spending package, saying targeted efforts to help certain parts of Russia's population were carried out on a rolling basis.

But President Vladimir Putin has instructed his government to study pension increases for working pensioners, to check whether public sector workers are fairly paid and to consider extending mortgage subsidies offered last year. The economy was hit hard by the COVID-19 pandemic last year. But the price of oil, its lifeblood, is now ticking higher as demand recovers.

Moscow's treatment of Navalny and his supporters means the United States and the European Union are weighing sanctions against it. So far however, the signs are that any sanctions will target individuals rather than sectors of the economy. Finance minister Anton Siluanov said this month that the prospects for state coffers and the National Wealth Fund (NWF) were looking good.

"If such a situation continues (rising oil prices), we may increase our forecast for the NWF and could decide to invest some of it," he said. Russia could increase the NWF, which now stands at $179 billion, by $25 billion to over $200 billion, provided oil prices and the rouble remain at current levels, according to Vladimir Tikhomirov, chief economist at BCS brokerage.

INFLATIONARY RISKS While oil prices are higher and the rouble nearly 15% weaker now than when oil prices were at the same level a year ago, there are lingering inflationary risks - a sensitive issue for Putin as he has said he will improve living standards.

"We believe that the expansion of social spending ahead of the elections and amid an economic recovery will definitely have a significant impact on inflation," Tikhomirov of BCS said, adding that the weak rouble had also become a risk factor for prices. Real incomes fell 3.5% last year despite pledges of an increase and inflation, which is eating further into Russian pockets, has reached over 5% in annual terms, above a 4% target.

The central bank has warned that reaching its inflationary goal will take longer than previously expected. But last week it said it may start raising rates as soon as this year. "Given that capital investments are at multi-year lows, household incomes are weak, and scope for further fiscal stimulus is limited, achieving a GDP recovery excluding the low-base-effect is a challenging task," said Dmitry Dolgin, chief economist for Russia and CIS at ING.

Dolgin expects the economy to expand by 2.5% this year after a 3.1% fall in 2020 amid the novel coronavirus pandemic, its sharpest contraction in 11 years. Officials forecast economic growth of 3-4% this year. ($1 = 73.5994 roubles)